The debasement trade is back, and it's causing gold and bitcoin to move in lockstep.
Both gold and the asset some call digital gold have been ripping higher as the U.S. government works to keep a lid on long-term bond yields. Since the start of the month, gold has surged more than 15% and bitcoin has jumped more than 25%.
That was enough to pull gold out of the red and into the green for the year. It's now up around 8% after being down that same amount at its low in June. Bitcoin is still off about 10% on the year, but that is much better than the 33% loss it was carrying at the end of June.
Long-term yields have been climbing for weeks, with the interest rate on the 30-year bond setting one 19-year high after another. It recently pushed above 5.3% for the first time in 19 years, up from 4.84% at the start of the year.
In response, the Treasury said it would buy back more long bonds, increasing the limit from $2 billion to at least $4 billion per operation, while signaling that number could rise even further.
The Treasury pays for those long-bond purchases by issuing short-term bills, effectively swapping long-term debt for ultra-short-term debt.
Initially, the pledge to ramp up buybacks did little to bring yields down. Officials then floated tapping the roughly $1 trillion Treasury General Account to buy long bonds outright, and that seemed to finally do the trick, taking some pressure off the market.
The long bond now sits at 5.17%, down 6 basis points on Tuesday and about 13 off its recent high.
The very effort to hold yields down is what revived the debasement trade. Suppressing long-term rates artificially could bring easier financial conditions, faster inflation and downward pressure on the dollar, some investors worry. The national debt recently crossing $40 trillion has added to those concerns.
In response, they have piled into scarce assets like gold and bitcoin.
Last year, both gold and bitcoin hit record highs on similar fears about the health of the U.S. government's finances. But they didn't move in lockstep throughout the year.
Both were at records in October, but then bitcoin collapsed while gold continued to rally, a divergence that puzzled many investors. Gold ended up peaking in January before also tumbling. Now both have rallied off their recent lows.
The correlation between gold and bitcoin has jumped in recent weeks. Measured on their daily returns over a rolling 90-day window, it now sits around 0.5, its second-highest level on record. The only time it ran higher was 2020, when waves of stimulus and ultra-low interest rates sent both assets soaring.
Longer term, the two don't tend to move together. Since 2010, the correlation between gold and bitcoin is close to zero.
We'll see where they go from here. Both assets are still below the all-time highs they set last year, gold by about 14% and bitcoin by about 37%.
Bitcoin in particular has had a rough run since last October as investor attention has shifted toward the AI trade. This month, the debasement trade has given it a shot in the arm. Whether the momentum lasts remains to be seen.